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Country watch: Japan

By
Wen-Dar Chen

July 10, 2014

Adopting a new perspective

The success of the first two tranches of Japan’s economic policy overhaul may be attributed to several factors. Some of these factors are cultural and deeply ingrained in how Japanese society responds to difficult change. Consider, for instance, the nation’s response to the Fukushima nuclear reactor meltdown following the massive earthquake that shook the country in 2011. Citizens and officials responded (and continue to respond) in an orderly, direct way. In the face of calamity, the Japanese approach has been to press forward rather than succumb to panic and disarray.

Other evidence in favor of Japan’s tenacity is more direct, especially when looking at performance in the corporate sector. Japan’s businesses boast achievements such as: (1) production of some of the best cars in the world; (2) a technology sector that is at the forefront of innovation; and (3) material contributions to just about every advanced industry in the world. Supported by these traits of endurance and resolve, we think it makes sense for bearish investors to consider taking a new perspective on Japan’s reputation for stagnation.

At the same time, we realize that for some investors, the road to a new perspective may be bumpy. Japan’s future could be affected by several headwinds, not least of which is a heavy load of government debt (relative to gross domestic product) that has increased steadily for a long time. Furthermore, administration officials will have to find ways to execute on the third tranche — the so-called “third arrow” — of structural reforms that have been put forth by Prime Minister Shinzo Abe. These reforms are by no means guaranteed to succeed, because they will involve deregulation and substantial changes to well-established industries. A mixture of debate and wringing of political capital will likely be part of the picture.

In light of what we’ve noted above, we are taking a positive — but balanced — view of the investment landscape in Japan. We believe the country has the will and perseverance to sustain economic health. At the same time, we will be monitoring potential headwinds created by sovereign debt levels and structural reforms.

The views expressed represent the Manager's assessment of the market environment as of June 2014, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

More from Wen-Dar Chen

Wen-Dar Chen biography

Wen-Dar Chen, Ph.D.

Senior Vice President, Senior Portfolio Manager and Analyst

Wen-Dar Chen, Ph.D., is a member of the firm’s taxable fixed income portfolio management team with primary responsibility for constructing global investment themes, international portfolio strategic asset allocation, and risk management. He has specialized in quantitative fixed income investments since 1986. Before he joined Macquarie Investment Management (MIM), which includes the former Delaware Investments, in mid-2004 as a senior international debt analyst, he was a quantitative analyst in global asset-backed securities, credit strategies, and portfolio strategies at J.P. Morgan Securities. Since 1998, he has worked to promote the asset-backed securities business in Asia, and published the book, Asset-Backed Securitization – Theory and Practice, in Asia in 2002. He worked at Salomon Brothers from 1993 to 1996, and Lehman Brothers from 1990 to 1993, during which time he gained experience with government securities trading desks, proprietary trading of structured products, financial strategies, and index strategies groups. Dr. Chen’s degrees include a bachelor’s degree in atmospheric sciences from the National Taiwan University, a master’s degree in meteorology from the South Dakota School of Mines and Technology, and a Ph.D. in geophysical fluid dynamics from Princeton University.

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